In a note to clients on Monday, Bank of America
Merrill Lynch’s Savita Subramanian wrote that Warren Buffett’s
favorite metric of long-term value "may have limited
utility."

The market cap to GDP ratio, which once
characterized as the
"single best measure" of value, is used to determine whether
the stock market is overvalued or undervalued.

And given that this measure shows the S&P
500 is 80% above its historical average level, some might find
signals from the market cap to GDP ratio concerning. But
BAML is skeptical about how good of a measure it actually is of
the stock market's value.

Subramanian points to three main reasons why the
metric is not one of BAML’s favorite for valuing equities:

Market Cap/GDP is
like Price/Sales, "with all of its shortcomings and
more." BAML adds that neither measure takes structural changes
in profit margins into account, which is problematic. In 2014
corporate margins grew to new highs due to lower taxes, lower
interest expense, and higher operating margins in tech.

Global GDP should be
used because it is more closely tied to the S&P
500 than US GDP. This is because S&P companies are
generating more and more sales and profits from overseas, not
just in the United States.

There are too many
mix differences between the US equity market and the
entire US economy. For example, sectors like technology and
energy hold a much stronger weight in the stock market than
they do for US GDP.Also, US GDP is more services-oriented,
while profits from S&P companies are more
goods-oriented.

Here’s what the Market Cap to GDP ratio has
looked like since 1964:

Bank of America Merrill Lynch

And so this measure currently makes the stock market
look expensive, but at least in BAML's view, there are
plenty of reasons not to worry about something that might have
the world's most famous investor concerned.